Tuesday, September 23, 2008

Each, All, and the Bailout

From Mike Munger, a Duke University professor of economics and political science, and the Libertarian candidate for governor.

“The state is the great fiction by which each of us seeks to live at the expense of all of us.” The 19th French economist Frederic Bastiat recognized something that seems to be eluding our wise men in Washington, and Wall Street.

If Bastiat were alive, I can guess his reaction to the bailout: First, we don't know what we are doing, and we are as likely to do harm as help. The desperate hurry comes from electoral politics, and not from any real economic necessity.

Second, we aren't creating value. Government can't create value in financial markets. All we are doing is shifting costs from one group (Wall Street bankers, and mortgage sellers who took enormous and unsupportable risks) and transferring them to another group (taxpayers, who don't know any better).

When you hear someone say “The government bailout of Wall Street,” make a mental substitution: “The taxpayer-funded bailout of Wall Street.” And then remember that we have a federal debt bigger than Jupiter.

Deficits are future taxes. The bailout is simply a way of allowing irresponsible lenders to escape unharmed. If you have a mortgage, and can't pay, then you are responsible. If AIG has debts and can't pay, our leaders want to soak taxpayers for the bill.

The point is that you can't take money away from taxpayers who earned it, give it to the financiers who squandered it, and call that a good policy. There is no danger of another Depression, which was caused by a deflationary monetary policy. We are facing a temporary credit crunch, and it will sort itself out if we leave it alone. Things aren't so bad that a panicked bunch of politicians can't make it much, much worse.

Each can't live at the expense of all. Not even if you are a rich banker.

With all due respect...Professor Walden has been quaffing the koolaid (kookaid?) when it comes to his assessment of the current housing/wall street/etc. debacle that's going on. Let's be honest, however...Professor Walden is, well, a professor...and he graduated from Cornell the year I was born. Yikes. I'm a first year grad student, and I'm not even taking 'grown up' PhD classes, but master's sections in econ classes. Oh, and I've never had an econ class in the past. Is that enough qualification? Alright, on to the kookiness.

1) You're going to compare the federal government to a doctor? I'm not even such a fan of doctors, but that's just disrespectful...to doctors. Doctors are highly trained, (arguably overly) specialized individuals. We all know about the pillage brokers, as Mencken referred to politicians, and what they're actually skilled at. This, as Munger stresses, is a look-at-me play perfectly timed for election posturing. To call them a doctor infers that they have some knowledge of that which they are operating on. Granted, Mr. Paulson knows a lot more than the average legislator...but not as much as the financial professionals know about their industry. There's more that can be said here, but let's leave it at "there is a huge dearth of true knowledge (vs. information and twisted incentives) among those in the government making the calls here".

2) "we" are going to have some asset in the future? HA. Unlikely, sir...unlikely. ASSUMING that there is some sort of efficient management that can occur through the government oversight of these assets (wow...I can't believe I said 'efficient' 'management', and 'government' in the same sentence), there will be no sort of disbursement to "the taxpayers", and no incentive to do so. Makes me think of non-profits, who have an incentive to increase the perquisites and decrease the left-over profits.

3) To continue on professor Munger's point, and professor Walden's analogy, the patients about to die on the table are corporations that made shit decisions, and made those decisions largely because the incentives were aligned against them, or more precisely, were aligned in precisely the right way to obtain exactly this wrong outcome. Russ Roberts has been detailing some of these incentives over the past few days at the Cafe.

What "we" should do is put those patients in quarantine, and allow them to die (note that I've tweaked the analogy to allow many patients, vs. the singular patient that Professor Walden described: we're not all dying, it's the infected ones that are). It's unfortunate; I'd like us all to live forever, but that's simply not possible at this point, and this rescue will simply allow the disease to spread its effects into more cities, towns, and countries.

Two out of the three parties in this party have a suspect incentive to desire this bailout, while the third has had little incentive to ever learn about the issue in the first place, and is now largely hearing voices from the first two camps. Is it surprising in the slightest that this would be an epic fail?